European stocks trade broadly higher, US banks earnings up next

European stocks are broadly advancing on Wednesday after a largely positive hand over from Wall Street. A less-than-expected inflation overshoot in the US calmed inflation outlook expectations and is unlikely to prompt the Fed to tighten policy. Treasury yields fell as low at 1.61% giving tech stocks the upper hand.

As inflation fears ease in the world’s largest economy, the mood in the global market has improved, overshadowing Covid vaccine concerns. European markets are shrugging off worries that the vaccine rollout programme could be hindered further by blood clotting issues in the Johnson & Johnson drug. Similar problems with the AstraZeneca vaccine are already slowing the vaccine rollout.

However, the forward-looking markets are focusing on economies reopening and the positive impact this will have on companies. Giving investors a taste of what is to come, LVMH reported an impressive start to 2021 as US and Chinese shoppers hit the stores in droves. The luxury retail sector is a notable outperformer in Europe.

Looking ahead, US bank earnings will be in focus. After a brutal 2020, the 2021 outlook is looking increasingly bullish for the sector as the US economic recovery becomes more established. Earnings come against a backdrop of rising expectations for a strong US economic recovery, optimism which has already driven the rally in banks’ share price to outperform the broader market two-fold. The narrative has changed from last year’s if-and-when the recovery takes hold, to the current question of how long will the expansion run?

Wells Fargo, Goldman Sachs and JP Morgan are due to report ahead of the market open today. Bank of America and Citigroup and expected to report earnings tomorrow.

Dollar falls to three-week low

Easing inflation fears and lower treasury yields are keeping the US dollar under pressure for a third consecutive session. The US dollar trades at a three-week low following the release of US inflation data yesterday.

CPI numbers revealed that consumer prices rose 0.6% in March compared to the previous month. This was ahead of the 0.5% forecast and the largest gain in more than eight years. However, the market has been bracing itself for a much sharper rise in inflation owing to massive fiscal stimulus, loose monetary policy and a swift vaccine rollout.

Soothing words from Fed Chair Powell, who has spoken several times over recent weeks, have also helped keep inflation expectations and concerns over the Fed tightening policy in check.

Oil rises as crude stockpiles decline

Oil prices are on the rise, breaking out of a tight trading range that has limited directional movement over the past week.

Upbeat industry stockpile data, an upwardly-revised OPEC demand forecast, a weaker US dollar, and geopolitical concerns over Iran favour oil buyers. The growing list of bullish factors is overshadowing concerns over a spike in Covid cases in Europe and tighter lockdown restrictions in the region.

API data revealed a draw of 3.6 million barrels in the week of 9 April. The supply crunch is expected to be met by higher demand amid the reopening of the US economy.

One of the most important factors underpinning oil prices has been an upwardly-revised OPEC forecast for global oil demand. Growth in 2021 to 5.95 million barrels per day is now expected, up from 5.89 million. The upward revision comes just weeks ahead of when OPEC is expected to start increasing output levels, which is likely to keep any gains in oil capped.

Gold’s gains lack conviction

Gold is extending gains for a second straight session following Tuesday’s inflation data and the J&J vaccine shock, although today’s move lacks conviction.

News that US medical authorities have recommended a pause in the use of the Johnson & Johnson single-shot Covid vaccine lifted demand for safe-haven gold in the previous session, and we are seeing some follow-through buying today. The pause is expected to last a few days, but the market is taking this in its stride for now. However, should the FDA and CDCP come out with a stronger statement, then we could see market sentiment take a harder hit, which could be supportive of the safe-haven gold.

Meanwhile, the weaker US dollar and depressed treasury yields are underpinning the dollar-denominated, non-yielding gold. Although, strength in the equity markets is keeping the upside limited.

Attention will now turn towards Jerome Powell, who is expected to speak at the Economic Club in Washington later in the day. More soothing words from the Fed Chair could keep treasury yields low and gold around the USD1,750 level.